Stocks with possible upside:
CSG Systems. With the economy improving, telecom spending is poised for a comeback this year. One related company that would benefit is CSG Systems (CSGS: news, chart, profile), a firm that specializes in outsourcing billing and customer care for cable and satellite providers and Internet access companies.
In recent months, investors have beaten up CSG's stock due to a major contract dispute with Comcast, its largest customer. But some analysts say the dispute could be resolved favorably in the coming months. At 17 times next year's earnings and about 8 times free cash flow, its shares are arguably cheap, and would likely take off if its deal with Comcast is soon resolved.
Aspen Technology. Software companies that dominate little corners of the broad market may continue to outperform. One that followers of my TechWatch column already know about is Aspen Technology (AZPN: news, chart, profile), a dominant seller of software for the oil and gas industry. Aspen Tech is perhaps the only software company to fully take advantage of rising commodity prices and a potential turnaround in the chemicals business in 2004. See full story.
The company's stock has already had a huge gain -- It's up more than 30 percent since early December. But Aspen Tech's management has cut the company's debt, previously the stock's main drawback, and is looking to boost sales. Aspen Tech shares could rise if the company signs more new supply-chain software customers in coming quarters, and if management can increase margins by cutting more costs.
Silicon Graphics. Computer maker Silicon Graphics (SGI: news, chart, profile) is about four years into a turnaround under CEO Bob Bishop. Aside from its recently raised quarterly expectations, SGI swapped debt that would have been due this year for debt due to mature in 2009, giving management some breathing room -- and a chance to work on boosting sales of the company's high-margin Altix Linux-based supercomputer systems -- products its competition doesn't have.
Few would deny that Silicon Graphics shares are cheap. Even after its 13 percent gain Friday, the stock still trades at less than 0.5 times sales -- among the cheapest tech stocks out there by that measure. It's true that SGI shares has languished for a long time, but this could be the year that shares move, due to a strong Linux-based product lineup that may be of particular interest to government customers.
On Semiconductor. A recovery in the chip sector seems likely to continue in the coming months, driving semiconductor issues even higher. One chip stock that's cheap on a price-to-sales basis is On Semiconductor (ONNN: news, chart, profile), which makes a broad range of power-management chips, as well as components used in everything from cell phones to computer routers.
A few insiders have been quietly picking up On Semiconductor's shares in recent months -- a possible sign that the company's turnaround is gaining steam. Management has cut almost half a billion in operating costs in 2003. Additional cost cuts are possible. And although long-term debt of nearly $1.3 billion remains a big concern, potential increases in operating margin due to pricing power seems likely -- a factor that could drive On's shares.
Iona Technologies. Iona (IONA: news, chart, profile) shares have more than doubled since October, and there's reason to think the company's product-driven stock run could continue. Iona launched a new product set in October called Artix that already has shown sales promise. It links various types of integration software products companies already have purchased.
Another potential sales driver is a services agreement Iona reached with JBoss Group, privately held maker of Java-based application-server software that can be downloaded of the Web for free. In conjunction with Iona, JBoss offers a lower-cost alternative to the software IBM and BEA Systems sells for linking data with many different types of corporate applications. JBoss makes money by selling services for setting up its software and making it run more easily. A person familiar with the matter said it is "very likely" Iona will announce its first deals to provide implementation services for JBoss customers when Iona reports first-quarter results Jan. 21. See full story.
PalmOne. After two years of declines, sales of hand-held computers may be positioned for an increase in 2004. The ones in greatest demand are the high-margin "smart phones" like the PalmOne (PLMO: news, chart, profile) Treo 600 -- an organizer and cell phone in one. Management says the Treo could become half of PalmOne's total sales in 12 months -- up from 25 to 30 percent of sales now. And PalmOne expects Treo to be carried by four or five new wireless telecom carriers this year, including T-Mobile. The more carriers PalmOne signs, the easier it is for customers to keep their current carrier when they switch to a smart phone.
Meanwhile, the price shareholders pay for PalmOne's intellectual property seems low. The stock trades at 0.3 times enterprise value-to-sales. By comparison, most hardware makers trade at multiple of 1 times sales, and rival Research in Motion trades at more than 5 times EV to sales.
Rambus. OK, this one is very speculative. The chip-design provider's stock is a wild child -- a volatile stock that's ridiculously overvalued based on current estimates. But there's reason to think the current estimates don't take into account Rambus' (RMBS: news, chart, profile) full sales and earnings potential in 2005, in the event the company has a few more good days in court this year. The outcome of the FTC suit is expected in February. This week, the company also got the OK to continue its suit vs. chipmaker Infineon Technologies. See full story.
Rambus is likely to prevail in a lawsuit brought by the FTC for alleged anticompetitive behavior in a standards-setting group, according to Erach Desai, an analyst with American Technology Research. The suit has been hanging over Rambus' head for years. Partly for that reason, Desai raised his 12-month price target on Rambus shares to $47, up from $35, and "enthusiastically" reiterated his buy rating. See full story.
Stocks with possible downside
Sirius Satellite. Although its stock has risen more than 40 percent the past two weeks and could rise even more this year, there could be a point in 2004 when money-losing Sirius (SIRI: news, chart, profile) runs into serious problems. Wall Street may conclude it's not worth paying 50 times next year's earnings to own the high-flying company.
For all that's gone right with Sirius -- the company's subscriber growth was 772 percent in 2003, and could be more than 200 percent in 2004 -- Sirius must cut costs quickly. At the end of its most recently reported quarter, Sirius spent $522 to acquire each new subscriber. Unless that cost drops, it could take more than 10 years until Sirius subscribers pay for themselves, assuming the company could eventually garner gross margins of about 40 percent (the company's gross margins are currently negative). A monthly churn rate of just 1.5 percent means that Sirius subscribers would only stay with the company for just a little more than 5 1/2 years.
OmniVision Technologies. The cell-phone camera market was arguably the strongest technology growth sector of 2003. Few companies benefited from the trend more than OmniVision (OVTI: news, chart, profile), a maker of chips that power the cameras. Growth rates were fueled as service companies offered special deals or gave away camera phones with new contracts. That's expected to continue for most of 2004; analysts are expecting tremendous first-quarter sales.
But at some point this year, other large chipmakers including Micron Technology (MU: news, chart, profile) could enter the camera-chip market, eroding OmniVision's margins. If that happens, OmniVision may be forced to trim its lofty growth estimates.
Siebel Systems. A lot of analysts were writing last fall that application software companies like Siebel (SEBL: news, chart, profile) would rally in early 2004, catching up with the strong performance of many infrastructure software makers. Guess what? They were right. But it started happening in the last months of 2003.
Now, Siebel is trading at about 55 times next year's earnings -- a level the stock hasn't reached since late 2001, according to Bernstein Research. Analysts expect the company to double earnings this year -- a goal the company might not reach, due partly to low-priced competition from the likes of Amdocs (DOX: news, chart, profile) and Salesforce.com. To justify its valuation, Siebel will have to achieve some big customer deals in 2004. While that could happen, there's little evidence that license revenue is on track for a big improvement so far.
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.
CSG Systems. With the economy improving, telecom spending is poised for a comeback this year. One related company that would benefit is CSG Systems (CSGS: news, chart, profile), a firm that specializes in outsourcing billing and customer care for cable and satellite providers and Internet access companies.
In recent months, investors have beaten up CSG's stock due to a major contract dispute with Comcast, its largest customer. But some analysts say the dispute could be resolved favorably in the coming months. At 17 times next year's earnings and about 8 times free cash flow, its shares are arguably cheap, and would likely take off if its deal with Comcast is soon resolved.
Aspen Technology. Software companies that dominate little corners of the broad market may continue to outperform. One that followers of my TechWatch column already know about is Aspen Technology (AZPN: news, chart, profile), a dominant seller of software for the oil and gas industry. Aspen Tech is perhaps the only software company to fully take advantage of rising commodity prices and a potential turnaround in the chemicals business in 2004. See full story.
The company's stock has already had a huge gain -- It's up more than 30 percent since early December. But Aspen Tech's management has cut the company's debt, previously the stock's main drawback, and is looking to boost sales. Aspen Tech shares could rise if the company signs more new supply-chain software customers in coming quarters, and if management can increase margins by cutting more costs.
Silicon Graphics. Computer maker Silicon Graphics (SGI: news, chart, profile) is about four years into a turnaround under CEO Bob Bishop. Aside from its recently raised quarterly expectations, SGI swapped debt that would have been due this year for debt due to mature in 2009, giving management some breathing room -- and a chance to work on boosting sales of the company's high-margin Altix Linux-based supercomputer systems -- products its competition doesn't have.
Few would deny that Silicon Graphics shares are cheap. Even after its 13 percent gain Friday, the stock still trades at less than 0.5 times sales -- among the cheapest tech stocks out there by that measure. It's true that SGI shares has languished for a long time, but this could be the year that shares move, due to a strong Linux-based product lineup that may be of particular interest to government customers.
On Semiconductor. A recovery in the chip sector seems likely to continue in the coming months, driving semiconductor issues even higher. One chip stock that's cheap on a price-to-sales basis is On Semiconductor (ONNN: news, chart, profile), which makes a broad range of power-management chips, as well as components used in everything from cell phones to computer routers.
A few insiders have been quietly picking up On Semiconductor's shares in recent months -- a possible sign that the company's turnaround is gaining steam. Management has cut almost half a billion in operating costs in 2003. Additional cost cuts are possible. And although long-term debt of nearly $1.3 billion remains a big concern, potential increases in operating margin due to pricing power seems likely -- a factor that could drive On's shares.
Iona Technologies. Iona (IONA: news, chart, profile) shares have more than doubled since October, and there's reason to think the company's product-driven stock run could continue. Iona launched a new product set in October called Artix that already has shown sales promise. It links various types of integration software products companies already have purchased.
Another potential sales driver is a services agreement Iona reached with JBoss Group, privately held maker of Java-based application-server software that can be downloaded of the Web for free. In conjunction with Iona, JBoss offers a lower-cost alternative to the software IBM and BEA Systems sells for linking data with many different types of corporate applications. JBoss makes money by selling services for setting up its software and making it run more easily. A person familiar with the matter said it is "very likely" Iona will announce its first deals to provide implementation services for JBoss customers when Iona reports first-quarter results Jan. 21. See full story.
PalmOne. After two years of declines, sales of hand-held computers may be positioned for an increase in 2004. The ones in greatest demand are the high-margin "smart phones" like the PalmOne (PLMO: news, chart, profile) Treo 600 -- an organizer and cell phone in one. Management says the Treo could become half of PalmOne's total sales in 12 months -- up from 25 to 30 percent of sales now. And PalmOne expects Treo to be carried by four or five new wireless telecom carriers this year, including T-Mobile. The more carriers PalmOne signs, the easier it is for customers to keep their current carrier when they switch to a smart phone.
Meanwhile, the price shareholders pay for PalmOne's intellectual property seems low. The stock trades at 0.3 times enterprise value-to-sales. By comparison, most hardware makers trade at multiple of 1 times sales, and rival Research in Motion trades at more than 5 times EV to sales.
Rambus. OK, this one is very speculative. The chip-design provider's stock is a wild child -- a volatile stock that's ridiculously overvalued based on current estimates. But there's reason to think the current estimates don't take into account Rambus' (RMBS: news, chart, profile) full sales and earnings potential in 2005, in the event the company has a few more good days in court this year. The outcome of the FTC suit is expected in February. This week, the company also got the OK to continue its suit vs. chipmaker Infineon Technologies. See full story.
Rambus is likely to prevail in a lawsuit brought by the FTC for alleged anticompetitive behavior in a standards-setting group, according to Erach Desai, an analyst with American Technology Research. The suit has been hanging over Rambus' head for years. Partly for that reason, Desai raised his 12-month price target on Rambus shares to $47, up from $35, and "enthusiastically" reiterated his buy rating. See full story.
Stocks with possible downside
Sirius Satellite. Although its stock has risen more than 40 percent the past two weeks and could rise even more this year, there could be a point in 2004 when money-losing Sirius (SIRI: news, chart, profile) runs into serious problems. Wall Street may conclude it's not worth paying 50 times next year's earnings to own the high-flying company.
For all that's gone right with Sirius -- the company's subscriber growth was 772 percent in 2003, and could be more than 200 percent in 2004 -- Sirius must cut costs quickly. At the end of its most recently reported quarter, Sirius spent $522 to acquire each new subscriber. Unless that cost drops, it could take more than 10 years until Sirius subscribers pay for themselves, assuming the company could eventually garner gross margins of about 40 percent (the company's gross margins are currently negative). A monthly churn rate of just 1.5 percent means that Sirius subscribers would only stay with the company for just a little more than 5 1/2 years.
OmniVision Technologies. The cell-phone camera market was arguably the strongest technology growth sector of 2003. Few companies benefited from the trend more than OmniVision (OVTI: news, chart, profile), a maker of chips that power the cameras. Growth rates were fueled as service companies offered special deals or gave away camera phones with new contracts. That's expected to continue for most of 2004; analysts are expecting tremendous first-quarter sales.
But at some point this year, other large chipmakers including Micron Technology (MU: news, chart, profile) could enter the camera-chip market, eroding OmniVision's margins. If that happens, OmniVision may be forced to trim its lofty growth estimates.
Siebel Systems. A lot of analysts were writing last fall that application software companies like Siebel (SEBL: news, chart, profile) would rally in early 2004, catching up with the strong performance of many infrastructure software makers. Guess what? They were right. But it started happening in the last months of 2003.
Now, Siebel is trading at about 55 times next year's earnings -- a level the stock hasn't reached since late 2001, according to Bernstein Research. Analysts expect the company to double earnings this year -- a goal the company might not reach, due partly to low-priced competition from the likes of Amdocs (DOX: news, chart, profile) and Salesforce.com. To justify its valuation, Siebel will have to achieve some big customer deals in 2004. While that could happen, there's little evidence that license revenue is on track for a big improvement so far.
Mike Tarsala is a San Francisco-based reporter for CBS.MarketWatch.com.
